2018-01-16 | Editor:et_editor 2081 pageviews

DRC Plans to More Than Double the Royalty Rate on Cobalt Exports; Rising Prices for Battery Metals Could Impact Electric Car Production

Prices of battery metals have been soaring recently as auto makers worldwide begin to compete in the market for electric vehicles (EV). According to reporting from news agencies and mining industry websites (e.g. Bloomberg, MINING.com, and the Market Mogul), the Democratic Republic of Congo (DRC) is planning to raise the export royalty on cobalt as its government senses a major revenue-generating opportunity. DRC is currently the world’s top cobalt producing country, accounting for about two-thirds of the global supply. A large hike in the export royalty will further push up the production costs of batteries and may adversely affect the growth of the EV market.

The DRC government is now working to change the country’s mining code to increase the export royalty on base metals from the present rate of 2% to 3.5%. Furthermore, the government will also start to put certain metals into the strategic commodities category. The proposed royalty rate for strategic metals is also higher at 5%. Martin Kabwelulu, Minister of Mines, announced that the revised mining code will change the status of cobalt from base metal to “strategic substance.” This means that the royalty rate for cobalt will more than double from 2% to 5%. The draft revisions to the mining code is still under review in the country’s parliament.

The mining industry has come out strongly against these changes, arguing that hikes on royalty rates will discourage foreign companies from investing in mining projects inside DRC. However, the DRC government points out that the neighboring country Zambia has instituted similar taxes and imposed rates that are much higher. Additionally, DRC wants to use the current boom in the cobalt market to boost its tax revenue.

Among the mining companies operating in DRC, Glencore PLC is expected to be hit the hardest by the increase in cobalt export royalty. Glencore has mines in DRC and is also the world’s leading cobalt supplier.

Cobalt prices have gone up dramatically due to the demand triggered by the developments in the EV market. On average, an EV battery contains 15 kilograms of cobalt. The trading price of cobalt at the London Metal Exchange (LME) shot up by 132% during 2017, from US$32,500 per metric ton at the start of year to US$75,500 per metric ton at the year’s end.

On the other hand, the changes to the mining code may not result in a significant impact on China. Chinese dealers dominate DRC’s market for cobalt ores, most of which are sent to China for refinement. China also has a large cobalt reserve.

Governments worldwide have been subsidizing EV purchases because of the high costs of EV batteries. Battery costs are expected to drop substantially in the near future, allowing consumers to buy electric cars without subsidies. However, the optimism is now being tempered by the surging cobalt prices. The continuation of this trend is going to have some adverse effects on the growth of the EV market.

As reported earlier by MINING.com and the Financial Times, the consultancy firm Wood Mackenzie has projected that the scale of demand for cobalt used in EV batteries will grow four times as large in 2020 and 11 times as large in 2025. Moreover, there is a possibility that auto makers will delay launching their EVs if they are unable to secure enough battery supply. Gavin Montgomery, director of metal market research at Wood Mackenzie, told the Financial Times that the sharp upswing in cobalt prices could slow down the cost decline for EV batteries. Moreover, tight supply for cobalt could also “impact the EV revolution” by constraining vehicle production. Although this view is considered too “alarmist”, Montgomery said it is nevertheless possible.

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